Today, the Senate Committee on Banking, Housing and Urban Affairs held a hearing to examine consumer protection issues in the payment card industry. Witness testimony was presented by the following individuals:

The hearing began with opening remarks from Committee Chairman Christopher J. Dodd (D-CT) regarding the urgent need to reform the practices of the nation’s credit card companies to provide greater consumer protection, especially in light of the current economic crisis. At the outset, he identified some of the “troubling practices” the credit card companies are engaged in, including:

  • Predatory rates, fees and charges;
  • “Any time, any reason” interest rate increases and account changes;
  • Retroactive interest rate increases;
  • Deceptive marketing to young people; and
  • Shortening the period consumers have to pay their bills with no warning.

Senator Dodd noted that while the Federal Reserve, Office of Thrift Supervision and National Credit Union Administration adopted rules last December aimed at curbing some of these practices, these rules fall “short of what’s actually needed to protect American families.” on February 24, 2009, the OTS will be hosting a live discussion about these new rules on unfair credit card practices.

One of the legislative proposals to reform abusive credit card practices is the Credit Card Accountability, Responsibility and Disclosure Act (the “Credit CARD Act”), which Senator Dodd recently reintroduced. Ranking Member Richard Shelby (R-AL) expressed a different viewpoint, cautioning that before enacting legislation, Congress should first give regulators the necessary time to implement the new regulations and evaluate their effectiveness. He suggested that legislators should be careful not to undermine the ability of our financial system to accurately price risk and stressed the necessity of balancing the needs of consumers and the banking industry.

At the outset of the hearing, certain members of the Committee, including Senator Sherrod Brown (D-OH), Senator Daniel K. Akaka (D-HI), Senator Charles E. Schumer (D-NY) and Senator Robert Menendez (D-NJ), offered remarks that highlighted: the importance of the need to educate, protect and empower consumers, including college students; the inability of the economy to recover if consumers are tied down with credit card debt; and the fear that disclosure may not be enough to help consumers escape a business model which induces consumer mistakes and leads to increased fees and revenues for credit card companies. Adam Levitin began the witness testimony by discussing the complexities associated with credit card company pricing structures and billing practices. According to Mr. Levitin, credit cards are more complex than any other consumer finance tool used today because they are laden with multiple pricing points and disguised costs such as annual fees, interest rate fees, late fees, and other miscellaneous fees and charges. Such complexities are unnecessary “tricks and traps” designed only to generate revenue for credit card companies.

Throughout the hearing, Kenneth Clayton represented the position of the credit card companies. Noting the importance of credit cards in our society, Mr. Clayton’s remarks focused on the risk that credit card companies assume in extending credit to consumers, due to the unsecured nature of credit card debt. He also discussed the sweeping nature of the Federal Reserve’s new credit card regulations, effective in July 2010, which will (i) eliminate many card practices, including “double-cycle billing” and the re-pricing of existing balances (including “universal default”); (ii) provide consumers with more time to pay bills; and (iii) limit up-front fees for cards and simplify communications to help consumers make better credit decisions. According to Mr. Clayton, the broad nature of the Federal Reserve’s regulations will affect every aspect of the credit card industry and will require significant operational changes for credit card issuers, including the revision of the issuers’ risk management model. He expressed concern that the changes could lead to reduced access to credit and increased credit costs at a crucial time in our economy.

James Sturdevant’s testimony offered a consumer’s perspective on credit cards in today’s society. He noted that in today’s society, consumers are being forced to pay for basic necessities on credit. He provided shocking examples of the abusive practices in which some credit card companies engage, including one company that established the location of its credit payment facility in New Hampshire because research revealed that it look longer for mail to reach New Hampshire over any other place in the United States. Because of the current practices of credit card companies, Mr. Sturdevant believes that legislation, as well as enforcement by government agencies and private litigation, is necessary to establish consumer protections against the abuses of the credit card companies.

Professor Zywicki, like Mr. Levitin, noted the complexities of the credit card industry. However, Professor Zywicki believes that the complexity is justified due to the complex ways in which credit cards are used. He believes that the fees are risk-based and expressed concern that efforts to limit penalty fees could impair the risk-based pricing model, leading to increased interest rates for all consumers. Professor Zywicki fears that an unintended effect of increased regulation will be decreased access to credit.

Lawrence Ausubel, who supports the Credit CARD Act, shared statistics that led him to conclude that credit card companies engage in penalty pricing, not risk-based pricing. While Dr. Ausubel was not opposed to the Federal Reserve’s regulations, he expressed concern regarding their delayed effectiveness and referred to them as “weak.”

As a representative of the Consumer Federation of America, Travis Plunkett focused his testimony on the current practices of credit card companies and the effect of these practices in our current economic times. Mr. Plunkett provided several examples of recent unjustified and harmful changes by certain card issuers, including new fees, increased rates and decreased credit lines. Mr. Plunkett called for the establishment of minimum fair practice standards to ensure that consumers are not subjected to unfair credit practices. Like others before him, Mr. Plunkett recognized the positive aspects of the Federal Reserve’s regulations, but again noted that the regulations’ effective date of July 2010 will not assist consumers in facing today’s harsh economic conditions. Mr. Plunkett believes that the Credit CARD Act will close certain gaps left open by the Federal Reserve’s regulations.

Following the witnesses’ prepared remarks, the witnesses fielded questions from members of the Committee. The questions raised issues that had not been previously addressed, including the securitization of credit card receivables, interchange rates and the offering of credit cards to young adults with no earnings history. In his closing remarks, Senator Dodd emphasized the importance of consumer protection for the overall well being of the markets and noted that, while consumers must accept some responsibility for their use of credit card products, we have learned that consumer protection is not antithetical to a healthy marketplace. Chairman Dodd stressed that point that action must be balanced and responsible, but cannot wait until July 2010.